What is a Small Business Line of Credit?
As an entrepreneur, you know how important it is to be prepared for whatever challenges and opportunities come your way.Whether you are interested in expanding your business, covering unexpected expenses, or looking to supplement working capital needs, a small business line of credit might be the best financing option for you.
What is a small business line of credit?A small business line of credit is a type of business loan that provides borrowers with optimum flexibility. If approved, the bank will assign a credit limit based on several factors like your credit score, income, etc. You can borrow up to your maximum credit limit as you wish and will only pay interest on the funds you spend. Whereas a small business loan would grant you a one-time, lump sum of cash up-front, a line of credit allows you to borrow funds as desired, pay them back, and then borrow again throughout the life of the loan.
Like a credit card, a small business line of credit is a revolving loan. Since a line of credit doesn’t have a pre-determined re-payment structure, much of the repayment is at the borrower’s discretion. You will often have a minimum monthly payment requirement, but you can pay more to avoid accruing interest charges.
A small business line of credit is subject to credit review and annual renewal, if you would like to keep it.
What are the benefits of a small business line of credit?There are many reasons a small business line of credit can be beneficial; here are a few:
- Greater control of your business – You know your business better than anyone. A business line of credit gives you readily available funds to use for business needs as you see fit: cover cash flow discrepancies, purchase inventory or equipment, or take advantage of exciting opportunities before they disappear.
- Only pay interest on what you use – A small business line of credit provides you with fast, flexible funding when you need it most. The funds are there for you to borrow as needed, and you only pay interest on the money you actually use. Your credit limit might be $7000, but if you’ve only withdrawn $700 from the account, you would only pay interest on the $700.
- Bridge cash flow gaps – Many small businesses use lines of credit to bridge cash flow gaps, especially if their business tends to be seasonal. For instance, if your business is highly dependent on tourism and you make most of your profits during the warmer months, a line of credit can help you survive the off-season until your sales are thriving, once again.
- Strengthen your business credit – Building up a strong credit portfolio is essential for most businesses. When you withdraw from your line of credit and then repay the debt faithfully each month, you build up your business’ credit history. Over time, this can help make you eligible for other business lending opportunities when you need them down the road.
Is a small business line of credit a good fit for my business?The flexible nature of a business line of credit allows you to use the funds however you see fit. While it’s important to have a savings account, it’s not ideal to drain your saved funds whenever you need cash. By design, business lines of credit can help small businesses thrive. These loans are great for meeting short-term cash needs, like purchasing inventory or covering operating expenses. They can also help cover payroll when needed or serve as overdraft protection if the situation arises.
The biggest advantage in choosing a small business line of credit is you avoid interest charges for un-used funds. A regular small business loan charges interest on the funds borrowed, where with a line of credit, you only will pay interest on the funds you use.